the BRIEFING: November 2012
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The Briefing is a new monthly piece by Transwestern that discusses the economy, global outlook and capital markets at a glance. It is an aggregation by Tom McNearney, Transwestern's chief investment ...

The Briefing is a new monthly piece by Transwestern that discusses the economy, global outlook and capital markets at a glance. It is an aggregation by Tom McNearney, Transwestern's chief investment officer, of other articles and reports.

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the BRIEFING: November 2012 Presentation Transcript

  • 1. the BRIEFINGTHE GLOBAL ECONOMY AT A GLANCENOVEMBER 2012 www.transwestern.net
  • 2. THE ECONOMY Standard & Poor’s put the odds of going over the fiscal cliff at just 15%, but forecasts unemployment at over 9.0%, if an agreement is not reached. A post-election Treasury rally suggests that investors are seeking safety ahead of the January 1st deadline.POSITIVE SIGNSƒƒ October employment grew by 170,000, almost double the average summer reports of 95,000ƒƒ October exports remained unchanged after rising 0.8% in September to a seasonally adjusted $187 billion ƒƒ Wholesale sales rose 2.0% in September ƒƒ Wholesale stockpiles grew 1.1% in Septemberƒƒ Due to stronger exports and domestic sales, Macoeconomic Advisers predicted that the 3Q12 GDP estimate would be revised upward from 2.0% to 3.2%. www.transwestern.net
  • 3. Housing Surprisingly sharp decline in the once economic bright spot.ƒƒ October new home sales dropped 0.3% to 368,000-unit annual rateƒƒ The National Association of Realtors reported price increases in 3Q12.ƒƒ 30-year home mortgage rate is 3.54%U.S. auto company recovery Home Depot 3Q12 resultscontinues despite slumping reflect stronger housingsales in Europe: market:$1.6 bn 1.4% 3Q12 income upFord’s 3Q12 profit, best ever80%Chrysler 3Q12 profit up 4.3% Same store U.S. sales up www.transwestern.net
  • 4. THE HEADWINDS The fourth quarter is not expected to be as robust as 3Q12:ƒƒ Tax increases and spending cuts meant to tame the budget deficit expected to cause between a 1.5% to 2.0% drag on GDP growthƒƒ October budget deficit jumped 22% to $120 billion – indicating the U.S. is on a path for its 5th consecutive $1 trillion-plus deficitƒƒ October retail sales fell by the sharpest amount since June, dropping 0.3%ƒƒ Roughly 25% of GDP growth in 3Q12 was due to one-time defense spendingƒƒ Blue Chip stocks have retreated to 3 month lows over fiscal concernsƒƒ Recent estimates suggest that the Greek debt-to-GDP is likely to grow to 180% vs. the target of 120% by 2020 – the slow motion train wreck continuesƒƒ Even the powerful German economic engine has slowed resulting in 2013 Euro growth projections revised downward from 1.0% to 0.1% www.transwestern.net
  • 5. CAPITAL MARKETS Investors all over the world are starved for yield, what with the 10-year Treasuries at approximately 1.61% and Morningstar corporate bond spreads for high- grade corporate bonds around 167 bps. Pension funds and insurance companies are hard-pressed to cover overhead, much less turn a profit or meet actuarial assumptions calling for an 8.0% annual return.ƒƒ Average CRE cap rates now trading at approximately 400 bps over Treasuriesƒƒ September CMBS deals hitting the market make 3Q12 most active quarter since 2008ƒƒ 3Q12 saw $11.4 billion of private-label U.S. CMBSƒƒ Four transactions totaling $3.3 billion hit the market the week of November 19thƒƒ 2012 expected to see $46 billion in CMBSƒƒ CMBS typically shoot for a 2.0% profit margin on plain conduit loans; with falling rates and spreads, profit margins on some loans have jumped to the 3% – 5% range www.transwestern.net
  • 6. CAPITAL MARKETS, cont.ƒƒ Since June 15th three pari passu CMBS loans totaling $545 million have closed ƒƒ A practice of carving up larger loans into participation interests of equal seniority shared among two or more securitizations. ƒƒ This helps reduce warehousing risk for larger loans because no single loan should exceed 20% per securitization. ƒƒ Resumption of the practice is another sign of improving CMBS market.ƒƒ CMBS spreads have fallen to levels not seen in five years. Some conduit lenders are quoting rates at roughly 4% – 75 bps lower than as recently as three months agoƒƒ Spreads over swaps have declined from 160 in July to 85 in Octoberƒƒ Life insurance companies have followed suit but have typically set floors at 3.85% and are unlikely to bend on leverage, typically limiting LTV to 65% www.transwestern.net
  • 7. 2013 REAL ESTATE FORECAST PWC and the Urban Land Institute’s annual forecast on real estate, 2013 Emerging Trends in Real Estate, captures the conventional wisdom of 900 real estate professionals, investors and lenders. A few items of note summarized by Clark Street Capital:ƒƒ The slow real estate recovery will continue to advance in 2013, with broader and continued gains in leasing, rents and pricing — real estate assets will continue to outperform fixed-income investments in a low interest rate environmentƒƒ Excessive pricing amongst core assets will encourage investors to chase yieldƒƒ Little construction, except for multifamilyƒƒ Problem loans will continue to be resolved slowly, with a gradual pickup in dispositionsƒƒ Changes in tenant demand due to technology and cost will present challenges www.transwestern.net
  • 8. REAL ESTATE FORECAST, cont. Overall, real estate has bounced back from its 2008 lows, due to both low interest rates and the durability of real estate as an asset class.ƒƒ Best Bets include: ƒƒ Acquisitions in infill locations ƒƒ Construct new-wave, “creative” office and build-to-core in 24-hour markets ƒƒ Develop industrial facilities in major distribution centers near ports and airports ƒƒ Consider single-family housing funds ƒƒ Repurpose obsolescent properties, recapitalize good-quality assets, lock in long- term, low-interest-rate mortgage debt, hold core properties in 24-hour cities ƒƒ Buy or hold public REITs and buy nonperforming loansƒƒ Best U.S. real estate markets: San Francisco, New York, San Jose, Austin, Houstonƒƒ Worst markets: Detroit, Las Vegas, Sacramento, Cleveland, New Orleansƒƒ Best markets by per capita: Austin, Salt Lake City, Houston, San Jose, Raleigh/Durhamƒƒ In ranking the major commercial property types, investment prospects were highest for multifamily, followed by industrial, hotels, office and retail www.transwestern.net
  • 9. the BRIEFING THE GLOBAL ECONOMY AT A GLANCE the BRIEFING is an aggregation by Tom McNearney, Transwestern chief investment officer, of other articles and reports. Tom leads Transwestern’s capital market efforts for development and investment nationwide. Tom also serves on the firm’s investment committee and board of directors, and he directs the execution and expansion of the firm’s principal investment activities across the country.DISCLAIMERCopyright © 2012 Transwestern. All rights reserved. No part of this work may be reproduced or distributedto third parties without written permission of the copyright owner. The information contained in this reportwas gathered by Transwestern from various sources believed to be reliable. Transwestern, however, makesno representation concerning the accuracy or completeness of such information and expressly disclaims anyresponsibility for any inaccuracy contained herein. www.transwestern.net